Driving Productivity

A new app is disrupting the taxicab industry  by making it possible for drivers and riders to find each other with the push of a button. With Uber, there’s no arm waving required: launched in 2009, riders reserve cars (often with drivers operating independently from a cab service) or find a rideshare by sending a text message or using the app; customers can then use the app to track their car’s location. Uber is currently available in 50 cities worldwide and expanding.

Historically, the activity of taxi fleets has been monitored and controlled by a central office, which provides dispatching, accounting, and human resources services to one or more taxi companies. When a customer calls for a taxi, a trip is dispatched by radio or computer  either to the first cab to book into the zone surrounding the pickup address via an in-vehicle computer system or to the cab closest by, as determined by GPS coordinates.

Uber’s disruption of the taxicab industry is a prime example of a company using new technology to outperform existing service providers in a market. In fact, taxicab firms found themselves on the other side of this equation in the mid-1990s, when new dispatching technology allowed firms to outperform individual professional drivers.

To better understand the impact of technology adoption by firms  and explain Uber’s success  Rawley and Timothy Simcoe of Boston University studied this 1990s phenomenon, which saw taxicabs moving from the older CB-radio style dispatching system to the then newly available GPS systems. They theorized that under certain conditions, when firms buy technologies that increase productivity, they have a strong incentive to expand vertically  to buy their suppliers or customers  and tend to shift toward a less-skilled workforce.

Using a combination of data on taxicab firms from the US Census Bureau, a University of North Carolina survey, and their own survey of the industry, the researchers were able to determine the kinds of dispatching technologies 250 US taxicab firms used in the mid-90s. They found that once firms began adopting GPS dispatching, the more skilled drivers  those who knew not only the best routes in the city, but where rider demand was highest, too  were forced to sell off their cars and medallions to the fleets and leave the industry. “Because the technology made fleets more productive, it made more sense for the fleets to buy up the assets, hire less-skilled drivers, and direct them centrally using GPS,” Rawley says. “This put the higher skilled drivers out of business, so to speak.”

However, Rawley points out that while their findings help explain why firms exist  as opposed to, say, a market made up of independent contractors  they also reveal fleets’ fragility. Newer technologies, like those used by Uber, that increase dispatching efficiency and essentially take the taxicab firm out of the equation can threaten the productivity advantage of firms over individual drivers. At the same time, though Uber’s market presence will force car and medallion leasing fees for individual drivers down by offering an alternative to working with taxicab firms, Uber  not the drivers  is likely to capture most of the surplus profit. “Interestingly, if Uber becomes dominant and taxicab firms exit the industry because simply maintaining and financing cars and drivers is no longer profitable for them, Uber may have to start buying taxicabs and matching drivers to cars themselves  just like traditional taxicab firms,” Rawley says.

Evan Rawley is the Roderick H. Cushman Associate Professor of Business in the Management Division at Columbia Business School.

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Evan Rawley is the Roderick H. Cushman Associate Professor of Business. He joined The Columbia Business School in the strategy area in 2012 from the Wharton School where he was an Assistant Professor. His research on corporate strategy and entrepreneurship has won numerous awards and has been published in Management Science, Organization Science, the Journal of Economics & Management Strategy, and the Strategic...

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